Access to consumer credit: Impact on low vs. high -income groups

Abstract

The availability of consumer credit has expanded greatly during the past twenty years in OECD countries. While higher income groups long had access to credit, the proliferation of credit cards has gradually increased access to credit for a wide range of household income groups and in virtually all regions of the United States. This dissertation searches for econometric evidence on how greater credit access affects savings, investment, and consumption patterns across different income groups. Some argue that poor households pay high interest rates and fees and wind up over-extended from the unsecured consumer credit that may actually reduce their disposable income and savings over the longer term. Wealthy consumers, on the other hand, may have easy access to revolving credit at low and even negative interest rates. Other models of credit constrained consumers suggest greater access to credit should allow low income households to invest more in schooling and housing, and to smooth or shift consumption forward therefore improve their and societies' welfare. ^ Findings in this paper show that increase in revolving credit increases the durable goods spending and the overall consumption, which includes both durable and non-durable goods consumptions, of the lower two income quintile groups. However, revolving credit decreases the savings rate of the majority of the quintile groups. Nonetheless, revolving credit facilitated homeownership of mid- to upper-income groups. Findings also suggest that revolving credit distorts the income effect on consumption and homeownership for the lower income quintile groups.^